QUESTION 7

Flying Kangaroo Ltd is an Australian resident company that provides air services between Australia and Canada. It has also reached an agreement with the Canadian government that allows it to fly a short haul domestic flight in Canada. The profits of the company are as follows:

• Flights between Australia and Canada - $15,000,000
• Domestic Flights within Canada - $700,000

Article 8 of the DTA between Australia and Canada relevantly provides:

1. Profits from the operation of ships or aircraft derived by a resident of one of the Contracting States shall be taxable only in that State.

2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State where they are profits from operations of ships or aircraft confined solely to places in that other State.
3. . [not relevant]
4. . [not relevant]

REQUIRED

1. How do Double Tax Agreements (DTAs) interact with domestic tax laws?
2. What profits of Flying Kangaroo Ltd would be taxed in Australia?

Make sure you explain your answer.